July 2011

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Picking up where we left off last week, here is tendency #19 in Charlie Munger’s take on the psychology of human misjudgment from Poor Charlie’s Almanack.

Tendency #19 – Use-It-Or-Lose-It Tendency

OK, all joking aside, there’s a lot to be said for this one and it’s pretty much just like it sounds. Use what you’ve got; the longer you lay off of something, the more it fades away. For me golf is the perfect example. I’ve played golf for close to 35 years and it’s more or less like riding a bike for me at this point in that I know the basics and how the game is played. But the finer points, the nuances that make the difference fade away if not practiced.

Munger makes the distinction too of why one may be learning a skill and how this can affect the bottom line. If one is learning for fluency or mastery as opposed to just trying to “pass the test”, then in most cases the skill is lost more slowly and also comes back faster when refreshed with new learning. Again, I would say this rings very true for me in golf. I view it (and investing) as a game for a lifetime.

While mastery in investing can be different for everyone and certainly subjective, the point is to never stop learning. There’s always something else to glean and always a new way to look at things. The world changes so fast and we need to keep up with that. Having a process in place that you can rely on as an investor provides a wonderful base from which we can go many different directions. So whether it’s reading, or writing in a journal or just talking stocks with friends (or perhaps hanging out at fool.com and trolling the discussion boards), do as Munger says: Use it or lose it!

The book is amazing; a must read. Here’s my wrap up interview with Tom Gardner on lessons he took away from his time with Mr. Zamperini along with links to all five parts of the interview: http://bit.ly/nFvGln

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I've heard the debate before over housing and jobs and which one will spark the other. So I ask myself two questions: First, can jobs get better without an improvement in housing? Second, can housing get better without an improvement in jobs? [more]

With 151 cruise ships representing 19 cruise lines, 53 resort spas, 11 urban hotel spas and six day spas Steiner maintains tremendous exposure to a wide consumer base around the world. Contractual agreements with ships typically last one to six years and land-based agreements range three to 25 years. The company also sells its own products and certain third-party products via aforementioned spas and cruises as well as online.

Big ships seem to be where it's at. As of February 11, 2011, 116 of the 151 ships served had large spa facilities. Ships with large spa facilities provided average weekly revenues of $59,521 in 2010 and $56,524 in 2009, as compared to average weekly revenues of $16,986 in 2010 and $14,397 in 2009 for the other ships served.

Balance sheet

The company has a healthy balance sheet with no debt and about 10% insider ownership, produces healthy returns on equity close to 20% and has kept revenue on a decent upward trend, even considering the recession. Margins have been shrinking a bit, but in good times they can maintain a net margin close to double-digits which I always love to see.

Revenue drivers

So a lot of this depends on how healthy the consumer really is. I mean if the cruise lines are hurting then so is Steiner. But it does seem like cruise lines are starting to come around, at least as far as traffic is concerned. And when you get on that boat, it's a lot easier to go ahead and justify pampering yourself cause you're already there. Like taking your kids to Disney...once you're in there money seems to lose all meaning. And come on, I mean who doesn't love a good spa treatment?

Valuation

I haven't done any extensive valuation work on this one, so it's hard to say whether it's cheap, expensive or just in between. Right now it trades for EV/EBITDA of 9.3 and 15 times trailing earnings. Going back 12 years (starting in 2000) these numbers average 10.4 and 14.6 with highs of 13 and 17.7 and lows of 7.3 and 11.2, so it feels like it's kind of in between really. A cursory glance at the cash flow statement looks pretty clean and they generate healthy free cash flow every year.

Moving forward Foolishly

I started initially looking at this on Friday, July 1 and it's already crept up from $46 to close to $50. That said, this is a rather thinly traded stock and I would expect it to swing more than most. I would say for sure it's on the watch list and I'm going to be digging a lot deeper. With a market cap of not even $750 million, this is the size company that can still offer some considerable growth.

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Picking up where we left off last week, here is tendency #18 in Charlie Munger’s take on the psychology of human misjudgment from Poor Charlie’s Almanack.

Tendency #18 – Availability-Misweighing Tendency

It’s pretty easy to place more value in what is near us at the time. Actually I think that the reference Charlie uses at the beginning of this one paints the picture nicely. He goes back to a song that says, “When I’m not near the girl I love, I love the girl I’m near.” Laziness probably has something to do with this (sorry ladies no offense meant; it could just as easily be a guy).

The best way to fight this tendency is through the use of checklists. Munger is a checklist kinda guy for sure. Actual physical checklists and mental ones, anything that can provide a rationale and steps can help. It can also be helpful to seek disconfirming evidence. We do that all the time here at Fool HQ when we lob stock ideas each other’s way. The best ideas come from those that are contested and truly put through the wringer.

As such, we also try to make sure to discount those ideas that seem so vivid and strong. In other words, underweight them so they don’t completely take over. We do this for example when attempting to value companies based on cash flows. What looks robust today may not be sustainable, so we discount the rosy picture to give a potentially more realistic scenario.

Do you think that something is worth more because it’s yours? If you come up with a killer stock idea that nobody else has gotten to yet, don’t you place a higher value on that idea? I think many do and that’s totally reasonable; there’s a sense of ownership there. But be careful as this can really impair judgment. I’ll close with the actual closing of this passage in the book as I think it sums it up perfectly: “An idea or a fact is not worth more merely because it is easily available to you.”

Foolish best,

Jason (TMFJMo)

Higher One

Here’s my latest video take on what the Durbin Amendment could mean for Higher One: http://bit.ly/nvxmq4